From the Birmingham Medical News, Allen Sullivan discusses the classification of workers as employees or independent contractors in a medical practice or hospital. Allen writes:
Since 2008 many companies have cut costs wherever possible, which often involves using independent contractors. Why? Employees are more expensive than independent contractors. Employees carry the burdens of health care benefits, minimum wage limitations, fringe benefit costs. None of these issues arise with independent contractors.
In addition to administrative burdens, employees also cost their employers more in employment tax than independent contractors. All employers must generally pay employment taxes (Social Security, FICA, etc.) of around 7.5 percent of each employee’s salary. There is no similar requirement related to independent contractors; they are responsible for their own employment taxes. Using the national income average of $43,000, an average employee costs his employer about $3,700 more than an average independent contractor in tax-related costs alone. Thus, all other things being equal, businesses treating their workers as independent contractors have competitive advantages over those treating similar workers as employees.
Independent Contractor or Employee?
Because the worker classification decision affects the bottom line, many companies prefer to classify their workers as independent contractors. But what makes one worker an employee and another an independent contractor? In a word: control. If a company has control over how a worker performs her job, then that worker is most likely an employee. The substance of the worker/company relationship therefore determines the worker’s classification, no matter how the company and worker decide to define the relationship. That is, you cannot simply label your worker an independent contractor and expect the IRS to take your word for it.
Since 1987, the IRS has used a “20 Factor Test” to determine whether or not a business has control over a worker. Each factor indicates control or a lack of control, and, in turn, either employee or independent contractor status. For example, if you require your workers to attend formal training, then your control indicates employee status. Control is also evident if a worker must work set hours, gets paid by the hour, or can be terminated at any time. On the other hand, if a worker is paid on a per-task basis, does the same type of work for other companies, and provides his own tools and equipment, then the paying company doesn’t likely control the worker enough to trigger employee status.
Read the full story at Why Do You Think that Worker is an Independent Contractor?